how bad were things for the 1966 group which are the numbers the 4% safe withdrawal rate is based on ?

far worse then most individuals and financial writers realize . mostly because they think it is based on some average returns that involve markets and interest rates being what they were and performing well or even average . it is clearly not . it is based only on the worst sets of numbers not only that we actually had but if monte carlo simulations are used , any set of numbers a computer can come up with using hypothetical combinations to find something even worse then we had .

after running 10,000 simulations and combinations dr pfau found little difference between our actual worst case vs what a a computer could come up with changing the sequences in to what was possible but didn't happen .. the monte carlo results came in at about 3.75% vs 4% actual .

so just what did this unlucky group in 19695 or 1966 see ?

for the 30 year period they saw a 9.67% annual return for a 60/40 portfolio starting in 1966 becomes a 4.46% real return after inflation, 5.41% for stocks and 2.39% for bonds. not really to bad right ?

however for the first 15 years, the 60/40 portfolio had a return of 5.74% nominal but -0.18% per year after inflation. Stocks returned 0.8% per year during this period and bonds returned -2.60% per year. And to round it out inflation averaged 5.92% during this 15 year period..

the fact markets bounced back later on after the first 15 years passed and improved the averages meant nothing , to much got spent down over the first 15 years in all the failure cases .

the math for that 15 year period was the worst ever for a retiree group , nothing to date has matched it .

Take a look at the 1966 retiree’s portfolio value, withdrawals, and current withdrawal rates during 30 years.

while the chart shows at the end of 30 years there was 10k left from 1 million after spending , when each year was calculated monthly as someone would actually pay bills and not yearly 4% failed . you need to drop below it a bit to actually have that 10k left from the 1 million you started with .

to put things in to perspective 90% of all 111 time frames left you with more then you started with 30 years later and 67% of the time left you with 2x what you started with .

the fact these poor soles ran out of money over the same 30 years gives you an idea how bad it was for that time frame and just how bad things need to be to have 4% fail . that isn't to say it can't going forward which is why you need to monitor things , but it is a tough act to follow to have it happen .

remember you can get no return on your money by sticking it in a mattress and inflation adjust 4% and it can last decades .

the important thing to remember is not all your money should be allocated to income generation anymore then when you were working you spent every penny coming in .

the 4% safe withdrawal rate assumes you will spend down principal to near zero generating that income planning for 30 years , but what if you live 35 ? .

so just like when working you have to decide how much in resources you want to preserve for emergency's , unexpected large expenses , long term care , heirs and do not include that in the calculations of your income generation ability .

as robin points out life can be filled with expenses so just like your working years you have to allow for the unexpected .

never forget the 4% "rule" assumes only income generation will not falter but you could be broke after 30 years or need a large sum of money in anyone year for something that is a budget buster .